Comments on: Who else is tired of hearing about the ‘latte factor?’ http://advancedpersonalfinance.com/latte-factor-misleading/ Moving beyond the basics Wed, 19 Nov 2008 15:37:38 +0000 http://wordpress.org/?v=2.2.2 By: Justin http://advancedpersonalfinance.com/latte-factor-misleading/#comment-5261 Justin Mon, 05 Nov 2007 06:15:23 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-5261 I can't tell you how refreshing it is to read a personal finance blog where the author is more of a realist. I'm a big proponent of saving, in fact I save over 50% of my after-tax income and live well below my means though I still splurge here and there and try to enjoy the finer things. So many PF blogs are not just proponents of saving, but proponents of spending as little as possible to still survive. What kind of life is that?? I'm not working right now and earning a high income simply so I can have more money to retire on when I'm 50 or 60, I do it partly to enjoy life now at a younger age. Yes, I am one of those people who buys a latte (or two or three) a day and I have no intention of stopping unless I get tired of lattes. I have a mid-6 figure liquid net worth and I'm in my early 30s. Even if I lose my job I'll be able to live comfortably for 10 years or so without any income. I will continue to save but will not worry about every little penny. Penny-wise and dollar foolish - that is how I would describe the majority of PF bloggers I've read (as well as their commentators). Saving money is basic, everyone knows to do it and frankly it isn't too hard to do. But there are two parts to the equation - saving money AND MAKING MONEY. The vast majority of bloggers don't concentrate on the latter and just the former. Making more money can easily do much more for you than simply working with what you have. Six years ago I was only making around $50,000 before I decided to get and advanced degree in a technical field. I did the degree part time for 2 years and as soon as I graduated I got an offer for close to $100K, I worked there for only 2 years before I got scooped up by another company for $120K plus stock options. This year I just got another raise bringing it up to almost $150K and my vested options are worth about $90K (not a fortune but not a bad additional income for just one year). This is because I decided the goal should be to focus on both sides of the equation, not just saving but also EARNING. The advanced degree got that for me. I would have otherwise been making less than half of what I make today. You don't have to get an advanced degree (but it helps tremendously), there are other ways to generate income of course. You have to find the opportunities, whether they be in real estate investing, some small business you can start, etc. Most of the people I know that have good incomes for my age do have advanced degrees (or degrees from top schools) but there are some people I know who made it without those things. The easy road in life is just to try saving more of what you have, but it won't get you as far as you hope, the harder road is trying to make a lot more money, and that is how people get trully rich. By truly rich I don't mean the 55 year old Millionaire Next Door type who has a million dollar net worth (which is frankly not much these days), but I mean the people who have passive incomes generating six figures and more so they have the ability to not work and still live well. I can’t tell you how refreshing it is to read a personal finance blog where the author is more of a realist. I’m a big proponent of saving, in fact I save over 50% of my after-tax income and live well below my means though I still splurge here and there and try to enjoy the finer things. So many PF blogs are not just proponents of saving, but proponents of spending as little as possible to still survive. What kind of life is that?? I’m not working right now and earning a high income simply so I can have more money to retire on when I’m 50 or 60, I do it partly to enjoy life now at a younger age. Yes, I am one of those people who buys a latte (or two or three) a day and I have no intention of stopping unless I get tired of lattes. I have a mid-6 figure liquid net worth and I’m in my early 30s. Even if I lose my job I’ll be able to live comfortably for 10 years or so without any income. I will continue to save but will not worry about every little penny.

Penny-wise and dollar foolish - that is how I would describe the majority of PF bloggers I’ve read (as well as their commentators). Saving money is basic, everyone knows to do it and frankly it isn’t too hard to do. But there are two parts to the equation - saving money AND MAKING MONEY. The vast majority of bloggers don’t concentrate on the latter and just the former. Making more money can easily do much more for you than simply working with what you have. Six years ago I was only making around $50,000 before I decided to get and advanced degree in a technical field. I did the degree part time for 2 years and as soon as I graduated I got an offer for close to $100K, I worked there for only 2 years before I got scooped up by another company for $120K plus stock options. This year I just got another raise bringing it up to almost $150K and my vested options are worth about $90K (not a fortune but not a bad additional income for just one year). This is because I decided the goal should be to focus on both sides of the equation, not just saving but also EARNING. The advanced degree got that for me. I would have otherwise been making less than half of what I make today. You don’t have to get an advanced degree (but it helps tremendously), there are other ways to generate income of course. You have to find the opportunities, whether they be in real estate investing, some small business you can start, etc. Most of the people I know that have good incomes for my age do have advanced degrees (or degrees from top schools) but there are some people I know who made it without those things. The easy road in life is just to try saving more of what you have, but it won’t get you as far as you hope, the harder road is trying to make a lot more money, and that is how people get trully rich. By truly rich I don’t mean the 55 year old Millionaire Next Door type who has a million dollar net worth (which is frankly not much these days), but I mean the people who have passive incomes generating six figures and more so they have the ability to not work and still live well.

]]> By: Advanced Personal Finance » Blog Archive » Weird Buying Psychology http://advancedpersonalfinance.com/latte-factor-misleading/#comment-2211 Advanced Personal Finance » Blog Archive » Weird Buying Psychology Wed, 26 Sep 2007 09:29:12 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-2211 [...] When it comes to buying versus saving, it gets even more weird. The Finance Buff left a comment on my post about the ‘latte factor’ to that effect. Here’s the comment: I also think the latte factor got it backwards. True, [...] […] When it comes to buying versus saving, it gets even more weird. The Finance Buff left a comment on my post about the ‘latte factor’ to that effect. Here’s the comment: I also think the latte factor got it backwards. True, […]

]]> By: i agree http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1803 i agree Sat, 22 Sep 2007 18:21:53 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1803 Its really not about the latte. It is about the small steps each one of us has to make toward saving and not spending. I hear over and over again that the country has a negative savings rate. So many people are either in debt or living pay check to pay check. So don't you think it helps to let the average person, who just started being interested in personal finance, know that saving money doesn't have to be hard and painful? All one has to do is re-evaluate what one spends money on, and decide if its really important. And maybe that latte everyday isn't that important. Maybe the extra $20 in their account at the end of the week is. Its really not about the latte. It is about the small steps each one of us has to make toward saving and not spending. I hear over and over again that the country has a negative savings rate. So many people are either in debt or living pay check to pay check. So don’t you think it helps to let the average person, who just started being interested in personal finance, know that saving money doesn’t have to be hard and painful? All one has to do is re-evaluate what one spends money on, and decide if its really important. And maybe that latte everyday isn’t that important. Maybe the extra $20 in their account at the end of the week is.

]]> By: Stephen Ward http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1707 Stephen Ward Fri, 21 Sep 2007 16:28:00 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1707 True enough, although I think the people quoting statistics like that are so bogged down in the details that they miss the main point. It's not the one cup of coffee you don't buy that makes you financially successful. It's the hundred little things you do on a regular basis to cut your expenses and save more. The point is to consider the financial impact of every decision, no matter how small. If you live a frugal life, you will become wealthy. That's the real point. True enough, although I think the people quoting statistics like that are so bogged down in the details that they miss the main point. It’s not the one cup of coffee you don’t buy that makes you financially successful. It’s the hundred little things you do on a regular basis to cut your expenses and save more. The point is to consider the financial impact of every decision, no matter how small. If you live a frugal life, you will become wealthy. That’s the real point.

]]> By: rstlne http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1704 rstlne Fri, 21 Sep 2007 16:15:23 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1704 Getting rid of the latte alone isn't enough. You need a change of mindset for it to have any significant impact. Once you get into a frugal mindset, you'll see dozens of expenses nickeling and diming you every day that you can cut. So the latte factor is misleading, but in the sense that it leads you to believe that cutting just one thing is enough. Getting rid of the latte alone isn’t enough. You need a change of mindset for it to have any significant impact. Once you get into a frugal mindset, you’ll see dozens of expenses nickeling and diming you every day that you can cut. So the latte factor is misleading, but in the sense that it leads you to believe that cutting just one thing is enough.

]]> By: The Finance Buff http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1691 The Finance Buff Fri, 21 Sep 2007 14:08:49 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1691 I also think the latte factor got it backwards. True, saving some small expenses helps, but it requires discipline day after day after day. The removal of small joys makes people resentful. Instead, it's the large money decisions that matter -- job advancement, purchase of a house, car, etc. Latte factor trivializes the savings efforts. Cutting down coffee is not enough. Serious savings requires real sacrifice. It means smaller houses, older, less expensive cars, less fancy furniture, less fancy vacations, ... I also think the latte factor got it backwards. True, saving some small expenses helps, but it requires discipline day after day after day. The removal of small joys makes people resentful. Instead, it’s the large money decisions that matter — job advancement, purchase of a house, car, etc. Latte factor trivializes the savings efforts. Cutting down coffee is not enough. Serious savings requires real sacrifice. It means smaller houses, older, less expensive cars, less fancy furniture, less fancy vacations, …

]]> By: Money Links For 09-21-07: Death Special http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1666 Money Links For 09-21-07: Death Special Fri, 21 Sep 2007 08:44:00 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1666 [...] Who else is tired of hearing about the ‘latte factor?’ by KMC @ Advanced Personal Finance. Reminds me of my resistance to the latte factor idea. [...] […] Who else is tired of hearing about the ‘latte factor?’ by KMC @ Advanced Personal Finance. Reminds me of my resistance to the latte factor idea. […]

]]> By: pipskippy http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1622 pipskippy Thu, 20 Sep 2007 21:27:03 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1622 Here's the paper that has the 12.56% average for the US stock market. [Wilson, Jack W. and Charles P. Jones. An Analysis of the S&P 500 Index and Cowles' Extensions: Price Indexes and Stock Returns, 1870-1999, Journal of Business 75-3, July 2002.]. Also, why assume the money would be taxed? Really, the people who would care about Latte factor are the people who haven't taken advantage of untaxed accounts. I'm going to have to look up the page numbers for the inflation stat, but I do appreciate your argument here. Here’s the paper that has the 12.56% average for the US stock market.

[Wilson, Jack W. and Charles P. Jones. An Analysis of the S&P 500 Index and Cowles’ Extensions: Price Indexes and Stock Returns, 1870-1999, Journal of Business 75-3, July 2002.].

Also, why assume the money would be taxed? Really, the people who would care about Latte factor are the people who haven’t taken advantage of untaxed accounts.

I’m going to have to look up the page numbers for the inflation stat, but I do appreciate your argument here.

]]> By: KMC http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1578 KMC Thu, 20 Sep 2007 13:09:06 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1578 @pipskippy - Thanks for your enlightened comments. First, according to the U.S. Department of Labor Bureau of Labor Statistics, from 1913 - 2006, the average rate of inflation has been 3.3%. From 1972 to present, the number is 4.78%. I used 4%. I don't know where you get your 2%. Second, indeed I did assume the saving was in a taxable account. That was kind of the point of the post - taxes, fees and inflation affect saving. Third, the historical average return of the S&P 500 from 1926 to 2006 was 10.4%. As you can see, I put quite reasonable figures into the calculator. I hardly think this qualifies as, "tortur[ing] a set of numbers." @pipskippy - Thanks for your enlightened comments.

First, according to the U.S. Department of Labor Bureau of Labor Statistics, from 1913 - 2006, the average rate of inflation has been 3.3%. From 1972 to present, the number is 4.78%. I used 4%. I don’t know where you get your 2%.

Second, indeed I did assume the saving was in a taxable account. That was kind of the point of the post - taxes, fees and inflation affect saving.

Third, the historical average return of the S&P 500 from 1926 to 2006 was 10.4%.

As you can see, I put quite reasonable figures into the calculator. I hardly think this qualifies as, “tortur[ing] a set of numbers.”

]]> By: pipskippy http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1504 pipskippy Wed, 19 Sep 2007 22:48:16 +0000 http://advancedpersonalfinance.com/latte-factor-misleading/#comment-1504 I'm annoyed as well, and it's obviously not ONE latte factor, but the many,many latte factors in daily life. Eliminate one, and there you go. Here's the thing, since you're supposedly offering advanced personal finance info, you should probably read Benjamin Graham's Intelligent Investor. Real inflation historically is closer to 2 percent. And you are assuming also that the money saved is taxed at both the state level and federal level. That would assume that someone has already maxed out their tax advantaged options and the latte difference would be invested in a non tax-advantaged account. The fact is that most people don't max out these options, and also that if they were to increase their savings via investment vehicles, it would be in traditional plans. So, I reran the calculator at the website you went to, and found that if you saved the $8 per workday, you would actually have $405k after inflation. Also, I believe the historical average for the SP500 is about 12%, which would throw the number to $709k. But, tell people whatever you want. If you torture a set of numbers long enough, it will tell you whatever you want to hear. I’m annoyed as well, and it’s obviously not ONE latte factor, but the many,many latte factors in daily life. Eliminate one, and there you go. Here’s the thing, since you’re supposedly offering advanced personal finance info, you should probably read Benjamin Graham’s Intelligent Investor. Real inflation historically is closer to 2 percent. And you are assuming also that the money saved is taxed at both the state level and federal level. That would assume that someone has already maxed out their tax advantaged options and the latte difference would be invested in a non tax-advantaged account. The fact is that most people don’t max out these options, and also that if they were to increase their savings via investment vehicles, it would be in traditional plans. So, I reran the calculator at the website you went to, and found that if you saved the $8 per workday, you would actually have $405k after inflation. Also, I believe the historical average for the SP500 is about 12%, which would throw the number to $709k.

But, tell people whatever you want. If you torture a set of numbers long enough, it will tell you whatever you want to hear.

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